Useful Financial Terms
is the change in the price of a bond bought at a discount to the par value of the bond. Accretion can be thought of as the antonym of amortization.
Interest that has been earned but not received or recorded.
An increase in the value or price.
Anything an individual or business owns that has commercial or exchange value.
The person designated to receive the proceeds of a life insurance policy, IRA account or 401(k) account.
Cash or other resources accumulated and available for use in producing wealth.
Money coming to an individual or business minus money being paid out during a given period.
Certificate of Deposit (CD)
A type of savings account that earns a fixed interest rate over a specified period of time.
Assets pledged to secure a loan.
is a form of corporate equity ownership, it is a type of security. There are “voting shares” and “non-voting shares”. The ownership is broken up in shares of common stock. The common stock shares of a corporation entitles the investor to a share of profits that remain after all other obligations have been met. The profits are usually paid through the distribution of dividends. Profits can also be made by the appreciation in the value of the common stock shares.
Interest is computed on the sum of the original principal and accrued interest.
A long term investment issued by a corporation with most common maturity of 30 years. Interest is paid semi-annually. The interest paid is taxable.
The granting of money or something else of value in exchange for a promise of future repayment.
Also refers the accounting term where a deposit is made to an account.
A person or financial institution or other business that lends money.
Typically a corporation that holds the investments and processes transactions within the investment accounts per the instruction of the customer, broker or advisor.
Custodian (for retirement accounts)
does not necessarily holds the investments but governs the retirement account as required by federal law. It also reports to the IRS contributions made as well as distributions made. This provides a cross reference to the individual’s tax return as to contributions and distributions made. The custodian files 1099s to the customer for distributions made for tax reporting purposes.
The opposite accounting term which is an expense charged to an account.
Money owed; also an accounting term referred to as a liability.
The amount of loss paid by an insurance policyholder. The deductible may be expressed as a specified dollar amount or a percent of the claim amount. To help reduce fraud, the insurance companies require a deductible so as to have the insured share in the loss.
The failure to make timely payments under a loan or other credit agreement.
The electronic transfer of a payment from a company to an individual’s checking or savings account.
The distribution of investments among several companies or asset classes to reduce the risk of loss.
A share of profits paid to a stockholder.
Ownership interest in an asset. It is the net value you have when assets have been reduced by all liabilities.
The principal amount of a bond, which will be paid off at maturity.
Fair market value
The price a willing buyer will pay and a willing seller will accept for real or personal property.
Federal Deposit Insurance Corp. (FDIC)
A federally chartered corporation that insures bank deposits up to $250,000.
401(k) Profit Sharing Plan
A tax qualified retirement plan that is sponsored by an employer. This type of plan allows employee participants to defer money from their paycheck pretax.
Health Savings Account
A tax advantaged personal savings account, set up to be used exclusively for medical expenses; it must be paired with a high deductible health insurance policy.
High-deductible health insurance plan
A health insurance policy that requires the policyholder to pay more out-of-pocket medical expenses but usually has lower premiums than traditional health insurance plans.
Individual Retirement Account (IRA)
An individually funded retirement plan. Individuals can contribute each year on a tax-deferred basis. Now referred to as a Traditional IRA. A custodian holds the account. A custodian can be a bank, brokerage firm, investment company, or insurance company.
A sustained increase in the price of goods and services.
The amount of money required for coverage under a specific insurance policy for a given period of time. Depending on the policy agreement, the premium may be paid monthly, quarterly, semi-annually or annually.
A fee for the use of money over time. It is an expense to the borrower and revenue to the lender. Also, money earned on a savings account.
The percentage charged for a loan, usually a percentage of the amount lent. Also, the percentage paid on a savings account.
Anything one acquires for future income or benefit.
An organization, corporation, individual or other entity that acquires an ownership position in an investment, assuming risk of loss in exchange for anticipated returns.
The ability to use a small amount of money to attract other funds, including loans, grants and equity investments.
Money an individual or organization owes; same as debt.
A creditor’s claim against a property, which may entitle the creditor to seize the property if a debt is not repaid.
The ease with which an investment can be converted into cash.
The fee a brokerage firm charges an investor for handling a transaction. Also referred to as a sales load.
A sum of money lent. The recipient of the loan pays back the loan, usually in installments paid back at a set interest rate over and above the principal amount of the money borrowed.
The fee paid to a company for managing an investment portfolio.
The amount a seller can expect to receive on the open market for merchandise, services or in our case securities.
The time when a note, bond or other investment option comes due for payment to investors.
Money market account
A type of savings account offered by a financial institution. The benefits of the money market account is the complete access of all funds at all times, liquidity. Of course in exchange for that liquidity you are paid a much lower interest rate.
A conditional pledge of property to a creditor as security for the repayment of a debt. A mortgage is usually 15, 20 or 30 years in length. Principal and interest is paid monthly with the interest loaded at the front of the loan and the principal amount paid increasing over the duration of the loan.
A bond issued by cities, counties, states and local governmental agencies to finance public projects such as construction of bridges, schools and highways. The interest paid on most municipal bonds is tax free and in turn is lower than traditional corporate bonds.
A mutual fund is a collection of stock, bond or money market securities that is owned by many investors and managed by a professional investment company. Learn More
The difference between the total assets and total liabilities of an individual or business.
The nominal, or face value of a stock or bond, expressed as a specific amount on the security.
A person’s salary before state and federal income taxes are calculated.
The lowest interest rate on bank loans offered to preferred borrowers.
The unpaid balance on a loan, not including interest; the amount of money invested.
A written promise on a financial instrument to repay the money plus interest.
A tax-deferred retirement plan for the self-employed, businesses and non-profit organizations.
The profit made on an investment.
Rate of return
The profit made on an investment calculated as a percentage of the principal invested.
A type of municipal bond backed by revenue from the project the bond finances.
A retirement plan funded with after-tax earnings, so no tax is due when the money is distributed at retirement.
A service depository institutions offer whereby people can deposit their money for future use and earn interest on their deposits.
The right to buy or sell a corporation’s stock at a predetermined price or calculable formula; sometimes used as part of employee compensation.
Stockholder or shareholder
A person who owns stock in a company and is eligible to share in dividends (if paid), profits and losses.
Phrase referring to money that is not subject to income tax until it is withdrawn from an account, such as an IRA, annuity, or a company retirement plan such as a 401(k).
The period from when a loan is made until it is fully repaid.
Provisions specified in a loan agreement.
A short-term investment issued by the U.S. Government for a year or less. The interest paid is taxable.
A medium term investment issued by the U.S. Government for two to ten years. Interest is paid semi-annually. The interest paid is taxable.
A long term investment issued by the U.S. Government with most common maturity of 30 years. Interest is paid semi-annually. The interest paid is taxable.
Protected security (TIPS)
A Treasury bond or note that is tied to inflation so that the principal amount of the investment increases or decreases according to the annual inflation rate.
U.S. Savings Bond
A nontransferable, registered bond issued by the U.S. Government in denominations of $50 to $10,000.
Zero Coupon Bond
A bond, corporate or treasury that is stripped of its coupons. The bond is purchased at a discount of its par value and accretes (appreciates in value) yearly as it approaches its maturity date. Upon that date the full par value is paid. The accretion is taxable and determined by an accretion schedule.
What to Look for in a Disability Insurance Policy
Unquestionably, disability insurance is more complicated than other forms of insurance. There are a lot of moving parts to understand in order to create the right kind of coverage, which may be one reason why many people are reluctant to look into it. No one likes to pay for something they don’t understand; however, once you understand the risk and your need for protection, purchasing a disability insurance policy becomes much more straightforward. Then you just need to know what to look for in a disability insurance policy to best suit your needs.
The Definition of Disability
You might think you are unable to work due to an injury or illness, and therefore, eligible for disability benefits, but the insurer may not agree. It depends on how it defines a “total disability” which is the key trigger for paying out the monthly benefit – the broader the definition, the better, while, the more narrow the definition, the less chance you may receive benefits.
An example of a broad definition is the “own occupation” definition that applies to certain occupation categories, such as physicians, dentists, attorneys and certain other professionals, which is:
“The inability, due to an accident or illness, to perform any of the material and substantial duties of your own occupation, regardless of whether you are able to work in another type of occupation.”
In this case, a doctor may not be able to perform surgery or emergency room duties, but he may be able to do consultations. So, he can qualify for disability benefits.
A more limited definition might say:
“The inability to work in any occupation for which you are qualified.”
That means that, if you are a teacher, and you are unable to stand all day in a classroom, but you can sit at desk and do research, you would not be considered “totally disabled” and, therefore, ineligible to receive benefits.
Another type of disability definition is based on a “loss of earnings” which will pay a benefit, if you are unable to work and your earnings drop below 80 percent of your pre-disability level. If eligible, you would then receive a benefit proportionate to your earnings loss. But, with some policies, you would have to be unable to work in any capacity in order to receive benefits.
The bottom line is that you should look for the broadest definition of “total disability” and have your disability insurance broker fully explain the circumstances under which the policy would pay benefits.
The elimination period of a disability insurance policy is like the deductible on your auto insurance – it’s the financial risk you assume before the insurance company begins to pay the benefit. As with auto insurance, the more risk you are willing to assume, the lower your premium cost. Choosing the longest elimination period – up to 6 months – could save you hundreds or thousands of dollars in premium costs over time. The best course of action is to accumulate a cash reserve equal to six months worth of living expenses that can be used to replace your income and then choose the longest elimination period for your policy.
Guaranteed Insurability Option
A Guaranteed Insurability Option allows you to increase your disability benefit without evidence of insurability. With this option, you are offered the opportunity to increase your benefit at specified intervals, and you can choose to use the option or pass (some policies limit the number of passes you can take before you have to exercise the option). If you anticipate your income to increase substantially over the years, the Guaranteed Insurability Option will protect your ability to add coverage even if you become uninsurable.
Cost of Living Adjustment (COLA) Rider
Should you become disabled and begin receiving benefits at a younger age, you could find the value of your monthly benefit gradually eroded by inflation. The COLA rider will ensure that your disability income increases with the pace of inflation at a minimum.
Work with a Disability Insurance Specialist
With fewer insurance companies offering disability insurance, it has become a specialty insurance product over the years. It is strongly recommended that you work with an insurance broker who specializes in disability insurance and who has access to disability insurance products from the top disability insurers.
What are Disabilities Policies and Why Would You Need One?
The prospect of suddenly having to face life with a disability that limits your ability to work in the way you’re used always seems unlikely. Disability is something other people face, maybe in old age, but not you. While disability insurance may seem unnecessary right now the facts give cause for the preemptive action. Approximately 12% of the total American population and more than 37 million Americans are categorized as disabled; more than half those disabled Americans are between the working ages of 18-64. Additionally, just over 25% of current 20-year-olds will become disabled before they reach retirement age.
Hopefully nothing ever happens that will limit your mobility or personal and professional productivity. But, in the off chance of an accident or the lasting effects of an illness you will be retroactively glad you invested in a disability insurance policy when you did.
Since health insurance is required to avoid a tax fee unless you can prove exemption, most people have an adequate health insurance plan to cover the unexpected broken bone or medicine for the seasonal illness. But, even if health insurance covers the costs associated with a serious injury or illness, it won’t cover the lost wages associated with the costs of lost earnings in both the short and long-term. Like it’s much better known plan relative, life insurance, disability insurance serves as protector of your future income that could be lost due to disability-related causes. Disability insurance won’t replace your salary, but it will provide an important buffer for financial stability.
So, how do you know if you should invest in a disability insurance policy? If you rely on your income to cover the costs of your basic needs, it’s a good idea and as important as life insurance. That being said, not all disability insurance policies are built the same. Plans offer different levels coverage, some of which may not be adequate to your potential situation. Because you’re planning for something that may or may not happen to various degrees of disability.
The first place to begin looking into disability policies is to look at your current insurance provider. For the majority of Americans, that provider is going to be their employer; 66% of nonelderly employees were offered employer-covered insurance health insurance and 56% of all households were covered by employer-sponsored health insurance in 2014.
Another option is individual insurance policies. You’ll want to price shop as coverage differs, so even if your employer does offer disability coverage it may not be sufficient and you should consider individual coverage.
Short or Long-Term?
Before you drop regular premium payments on yet another insurance policy it’s important to know what type of disability coverage you want to purchase. Long-term disability insurance is truly the better bet when it comes to gambling with health. Thankfully advances in medicine and technology are allowing humans to live even after severe illnesses or injuries, but that also means you can live for a long time without being able to fully work. In general, long-term disability insurance can cover around half to 70% of a salary, but that salary is set at the time the policy is obtained. As you gain promotions and salary increases it’s wise to increase the plan value and to do so may require an annual physical or other requirements.
Be sure to zoom in on how the policy defines “disability.” For some plans that includes categories like mental illness and others exclude categories such as injuries acquired from dangerous activities. The payout for long-term disability can look very different, ranging in five to 10 years of payout, to a pay out until 65-years-old.
Comparatively, short-term disability will cover more of a salary (around 100% of income for the initial payout) and is used in lieu of salary for the insured who misses up to six months or less of work. If the insured still cannot return to work after a certain term, coverage drops down to around 60% of the salary.
Just because you purchase a disability insurance policy doesn’t mean it cannot be revoked or changed. The two main types of policy assurances you’ll see are “non-cancelable” and “guaranteed renewable.” If premiums are similar, non-cancelable is usually the best way to go as the insurance company can’t raise the policy premium. It’s essentially double the guarantee. Policies marked as guaranteed renewable mean that so long as premium payments are paid, the insurance company cannot drop it.
Most policies you find will be designated as “any-occupation.” This means that the policy owner must work when capable even if not to the same level as prior to the disability; this requires an analysis of the “gainful” employability of the policyholder. With any-occupation policies, long-term disability benefits are awarded if the disability inhibits the policyholder from finding and keeping work that will allow for at least 60% of the salary pre-disability. Another option, “own-occupation” largely benefits the policyholder with a high salary and highly skilled occupation. This type of policy allows for the individual to collect benefits until they can resume their occupation as it was before the disability arose.
Policies can also be written to include different “riders,” or options. One important rider is “cost of living” (COLA). With COLA, a policy’s total value increases as inflation does. Additionally, residual benefits make up the difference between old and new salaries following the diagnosis of disability, if the policyholder can indeed get a new job but one that’s not up to the same salary as the one pre-disability.
You’re not alone in looking toward disability insurance. More than 650,000 disabled employees received a collective $9 billion in long-term disability benefits from employer-sponsored group disability coverage, in 2012.
Disability Insurance Tips for Professionals and Executives
High earning professionals and executives need the ultimate in disability income protection without which they can jeopardize their financial future. It’s not enough just to buy a policy; you need to know that it will pay the benefits you expect when it’s needed the most. Each of these tips provides a vital piece of the disability insurance puzzle.
Seek Value over Price
- You should expect to pay up to 4 percent of your salary to secure a solid disability insurance plan that meets your needs.
- “You get what you pay for” is not something you want to hear when protecting your most valuable asset. Paying the least expensive premium will be the least of your concerns when you actually need the benefits.
- Disability insurance is not a commodity; it is a contract that specifies when and if benefits will be paid.
- There are many more important components of a disability policy beyond price that should be carefully considered such as the exact definition of disability.
Review the Company Ratings
- Your disability company could be your primary income source for a long time, so it’s important that its financial integrity be unquestioned.
- The financial strength of disability insurance companies are assessed and ranked by third part rating services. You should consider companies with a rating no lower than A+ by AM Best.
Be Wary of Group Plans
- Group plans are typically subject to change and they may be cancellable.
- Most plans are not portable. If you change employers or groups you may lose your coverage.
- Disability income benefits from group plans are taxed as ordinary income.
- Monthly benefits may be capped.
- Group plans typically offer a limited definition of disability, often requiring that you be totally unable to work to receive benefits.
- Benefits paid by group plans are often reduced by the amount of income you might receive from other sources, such as workers compensation.
- Most disabilities are partial, yet group plans typically do not to cover partial disability.
Scrutinize the Definition of Disability
- For professionals and executives, a policy that pays a benefit when they are unable to perform the specific duties of their own occupation is much more preferable than one that pays only if they can’t perform the duties of any occupation.
Protect your Purchasing Power
- Over a 20 year period your purchasing power could be reduced by half due to inflation. A monthly benefit of $5,000 would amount to $1.2 million over 20 years without adjustments for inflation. With inflation adjustments of 3 percent a year, the total benefit amount would be $1,641,000.
Buying Multiple Policies Saves Money
- Professionals and executives working in a practice or company together could save as much as 50 percent in premium costs by purchasing their individual disability policies as a group.
The 90-Day Waiting Period is Usually the Most Cost Effective
- The 90-day waiting period is typically the best option for keeping your premium low while maximizing your coverage. To go from a 90-day waiting period to 60 days could almost double your premium. Conversely, by extending the waiting period to 180days you would only realize a 5 percent reduction in premium.
Only Buy Policies That Are Guaranteed Renewable and Non-Cancelable
- They lock in your rate for the life of the policy and guarantee that your policy will be renewed each year regardless of your health or employment status.
- They go wherever you go – from state to state or job to job.
Buy from a Specialist
- Disability insurance is a specialty that few insurance agents truly understand especially as it applies to the demands of high earning professionals and executives. Be sure to work with a knowledgeable disability insurance specialist who has access to products from the top disability insurance carriers.
Protecting Your Biggest Asset
Life is full of risks, and people make decisions everyday that require weighing those risks against their ability to protect themselves using their own resources or by transferring the risk to an insurance company. Most people realize that they couldn’t afford to rebuild a damaged home or buy a new car without insurance. While these are important and expensive assets, the actual risk of loss pales next to the loss of their biggest asset, their ability to earn an income.
It is well documented that the average person is much more likely to experience a work-ending disability than they are to lose a car or home in an unexpected catastrophe. Based on current statistics, almost one in three people from the age of 35 up through age 65 will experience a disability that will prevent them from earning an income for 3 months or more. Yet, this risk goes unheeded for the majority of working people.
When You Least Expect it
No one expects to become disabled, certainly to the extent that it would prevent them from working for a period of time. Even though it happens all around us – a friend goes down with a debilitating back injury; a relative is hospitalized with a serious illness; a colleague suffers from a severe bout of depression – most people think that it can’t happen to them. And, they sink deeper into complacency thinking that, somehow, their employer benefits will cover them, or the government will provide a safety net.
Disability Protection Essentials
Considering that even a one-year disability could amount to a loss of tens of thousands of dollars in earnings for the average worker, and tens of thousands for a multi-year disability, it’s no stretch to proclaim that one’s ability to earn a living is the single biggest asset they have. And, just as we transfer the risk of loss for our valued assets (car, home, jewelry), so too can we transfer the risk of loss our biggest asset – which is where disability income insurance comes in.
Disability coverage is designed to protect against the loss of earnings up to 70% which is based on the fact that the income benefits are received tax free. And most coverage can be purchased for a set number of years, such as five years. Shorter periods are available, and longer periods are harder to get or much more expensive.
Coverage for disability comes in two forms – own occupation coverage and loss of earnings coverage. Own occupation coverage protects against the inability to perform the duties of one’s primary occupation, even if they are able to perform the duties of another occupation. This type of coverage is difficult to qualify for, as it is only available for certain occupations.
Loss of earnings coverage is designed to replace a portion of lost earnings. Even if a disability results in reduced earnings, this coverage will replace the part of earnings lost.
Buying disability coverage is not unlike buying home or car insurance. The premium is affected by the terms of the coverage; much like a deductible can affect the premium for car or health insurance. For instance, a longer waiting period (the time between the disability occurrence and the receipt of benefits), will reduce the premium. Or, the longer the benefit period is, the higher the premium will be.
Disability coverage has become a specialty insurance that is provided a handful of insurance carriers. It would be important to work with a disability specialist who can tailor a policy to meet your specific needs and budget